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‘Rocket fuel’ for the property market: The dangers of Osborne’s pensions revolution

Experts are warning Chancellor George Osborne’s pensions revolution will be “rocket fuel” to the property market as concerns are raised over pots running dry too quickly.

In the Budget, the Chancellor announced from April next year anyone who is aged 55 or over will be able to take their entire pension fund as cash.

The first 25 per cent will be tax-free but the remaining 75 per cent of the fund would be taxed at the saver’s marginal rate.

Property

The new rules could see a boost to the buy-to-let market as many invest their pots into residential property.

Think tank Strategic Society Centre director James Lloyd believes the buy-to-let market is the most likely home for newly released pensions cash.

He says: “The Chancellor has thrown rocket fuel on an already overheated property market, and millions of young first-time buyers will suffer as a result. It is a catastrophic policy decision.”

Borrowers could also use a windfall to pay off interest-only loans at the end of their deals if they wish.

Investment choices

If the money is not ploughed into property then some believe it could end up sat in a bank account languishing on low returns.

Lloyd says: “What do people do with a big pile of savings in retirement? Either they splurge and rely on the state or most people go into excessive cautionary savings with a low income because they are afraid of losing it. People will have worse incomes as a result of this move, not better.

“In decades to come George Osborne will be seen as the Chancellor who destroyed pensions.”

Pensions consultant Rachel Vahey says: “There are a lot of people who will just dither and not know what to do. They will simply put it into a bank account and be unable to make a choice because they might not want to, or be able to afford, face to face advice. The risk is they keep from withdrawing the money from the bank and it will not last.”

The role of advice

Concerns around how individuals will choose to spend their money points to the need for expert advice and guidance.

Alongside his reforms, Osborne has set aside £20m scheme over two years to guarantee all member of defined contribution pensions schemes are offered face guidance at-retirement. The initiative will also be funded by an unspecified levy on pension providers and trust-based schemes.

Experts say advice is not just needed at retirement but post-retirement if someone is managing their own pot over time.

Hymans Robertson partner Chris Noon says: “Free government-backed advice at-retirement is a great thing, but for many savers they are now facing a retirement with a need for regular advice post-65.”

Financial consultant Richard Hobbs says: “This is compounded by problems from the RDR, which is a shortage of advisers for this brave new world. Although these radical reforms are very exciting, there is a key risk that there is a shortage of advisers and the initial users are likely to use their pots unwisely.”

Care costs

Pensions pots withdrawn as cash will count towards any means test whereas earlier it was only annuity or drawdown income that applied.

Experts say the rules around avoiding means test thresholds will need to be tightened to avoid local authorities facing higher bills.

Lloyd says: “You can take the money as liquid savings and do anything you want with it. It is child’s play to take it beyond the means test.

“People think about the optimal arrangements of their assets to get the most from local authorities, and this practice is already rife.

“Long before they need care people think about the optimal arrangements of their assets to get the most from local authorities, it’s already rife. The Care Bill will bring in a lifetime cap on care costs which will increase this activity because more people will have an immediate incentive to come within the means test threshold.”

Symponia managing director Janet Davies says: “If someone has spent their pension money then would the local authority could say you have spent money to avoid care costs when it was meant to last. The rules need to be tightened.”

In the House of Commons this week, pensions minister Steve Webb said: “We have to make sure these measures are joined up with our policy on long-term care so that we have the right outcome. “

Annuities

The Institute for Fiscal Studies says annuity rates will go up as the market shrinks and providers have to insurer fewer people.

Barclays analysts expect the annuity market to shrink by two-thirds in the next 18 months, from £12bn to £4bn a year.

Insurers’ share prices dropped signifiantly on the day of the Budget with Partnership falling by over 50 per cent in 24 hours.

Webb has insisted some people will still buy annuities, and is adamant the changes do not mean the “death of annuities”.

To hear from a range of industry experts about the future for annuities, join us at the Money Marketing Forum in April. Register for your free place today. (London venue FULL)

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19th November 20182:58 pm

Comments

There are 8 comments at the moment, we would love to hear your opinion too.

James Lloyd is just plain incorrect to see that the buy to let market will be flooded with new money. People taking all of their pension pot to buy a property will probably have in excess of £200,000 in it. If they take it all out at once to buy a property they are likely to pay so much tax that the remaining sum could be about £150,000. then deduct stamp duty, solicitors costs, estate agents management fees and it makes little sense. No, most buy to let property will still be mortgaged as it is now and just how many BTL individuals start when they retire?
If crystalised money remains in the pot they could invest (however unwisely) in a residential property fund and not suffer the tax charge but take the rental income. No work either! We will see if the post 75 death lump sum charge remains. I suspect they will reduce this to 40% to align it with IHT.
Advice pre and post retirement for those drawing down is most essential to allow decent withdrawals and eking out the remaining pot for a decent length of time.
When looking at expenditure patterns of the elderly, maximum spend is between retirement and about 77. This will allow people to do just that!
Knee jerk reactions from those with little understanding should not be taken seriously

Also don’t forget that the pension fund would be taxed as income once at withdrawal, and then any income generated from a buy to let purchase would be liable to income tax again. Now, if residential property could be held in a SIPP… time to debate that one again!

The debate being stoked up about people “wasting” their pension fund assets is a bit of a red herring. Currently there are people who due to life events (divorce, unemployment etc) end up needing to work longer than they wish to pay a mortgage in later life. If they could take a fund sufficient to repay their debts then this would mean financial freedom instead currently most people get a miniscule payment (less tax) every month. Equally how many people “buy a Lamborghini” with the 25% Tax Free Cash now if it is sufficient to fund one. Very limited from my experience. People currently can arrange an annuity and “Waste” money on their own choice of vice monthly meaning they are left financially pushed and cannot afford their retirement, how is that different to “Wasting” it all at once. If someone wants to invest in residential property what is wrong with that?

I think James Lloyd is spot on. “goodness gracious” you say, “Most buy to let property will still be mortgaged as it is now and just how many BTL individuals start when they retire?” Well I think you underestimate the appetite retirees will have to invest in property and I also believe many will now decide to retire early just to get into this market. You don’t need much capital to get a decent little portfolio of properties going within the 1% stamp duty threshold when you mortgage and BTL mortgages are now attractive compared to recent years. For now I fear a spike in demand will again be to the detriment to those trying to get on the housing ladder.

The last thing my clients want when they retire is the hassle of managing buy to let properties and that includes those who’ve had portfolios of buy to lets since the 1980’s.
Those who’ve been in business for 30 or 40 years sell their business as they no longer have the energy or desire to manage it. This is no different with those people doing buy to lets I would have thought. A B2L portfolio can be a lot of work.

Diversification……. not all eggs in one basket …….. unless we have a crystal ball.

Last year I could have sworn I read someone saying lets put all our money in to holiday homes on the Black Sea…. what can possibly go wrong? If you’re still working, you can work you way out of something. If you’re retired overfocus on one asset class which goes “tits up” is not easy to correct.

I’m no expert on mortgages, though I imagine it may be very much more difficult to get one against the income (or capital) available from an open access pension fund than against a fully secured annuity.

Also, people may well plunder their pension funds at a reckless rate on the basis of doing so now before the access rules are changed (again) by reining in the limits to something not much better than an annuity.

What’s needed is a vehicle capable of extracting more income from a given pension fund (than an annuity can) without compromising the sustainability and security of that income for life. This latest open access policy goes from one extreme to another and in my opinion hasn’t been properly thought through. Webb’s suggestion that the government is unconcerned about the possibility of people withdrawing everything to blow it on a Lamborghini is extremely stupid. The government should be very concerned about the risk of some people doing such a thing.

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